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November 3, 2004
Samex Capital's Stock MarketCROSSCURRENTS
Alan M. Newman, Editor
This excerpt from the November 1stissue has been posted
to coincide with receipt by snail-mailsubscribers.
Is there a housing bubble with tremendous consequences when thatbubble busts? Seems to us there are way too many assets now categorized as in"bubbles." In our view, many of the concerns are overdone and while thereis clearly a boom underway, it has not yet reached anywhere the critical mass achieved bystocks in March 2000. For starters, at the very earliest, the stock bubble commencedat the point when Nation's Bank Mickey Levy posed the "possibility" of a brewingbubble after the Dow broke above 4000 in February 1995. Measured to the 2000 top,the move was less than three-fold - more like 193%. The mania in Nasdaq issues wasfar more pronounced, taking the Nasdaq Composite up a resounding 535% and the S&P 500soared 160% from low to high.
By comparison, CNN recently reported (http://tinyurl.com/64qyd) how prices fared for the10 zip codes with the largest median five-year price increases in the top 10 largest metroregions and in no case does the housing boom remotely match, let alone exceed the maniafor stocks. The largest gain reported was Los Angeles zip code 90019's 168.9%increase. In the Seattle/Tacoma area, prices averaged increases a tad above 50%while in Detroit/Ann Arbor/Flint, prices managed gains of only 43% on average - hardly abubble. We need to realize stocks trade in one national arena (actually severalexchanges, but for all intents and purposes, it's one arena), while houses trade in veryseparate arenas. Each municipality - even each neighborhood - is a market untoitself and prices are not necessarily robust everywhere. When a perceived bubblebusts, it does not bust everywhere and at the same time. There has never been anationwide decline in prices, but as the National Association of Realtors has reported,dips do occur, such as Honolulu's 17% drop during 1990-99, Los Angeles decline of 21% from1991-96 and Houston's 23% hit suffered from 1982-88. These were not crashes, butslow declines that took place over several years and different periods at that, a fardifferent experience than the wealth destroyed in the fallout of 200-2002 in U.S. stockmarket. Prices can't rise forever before healthy corrections get underway but that'sall we're looking for, certainly not the overall smash predicted by some.
We covered our SPY short two days and 1% too early, essentiallybreaking even, but are satisfied to have made a conservative decision in a very tough andnearly trendless trading environment. Well then, maybe the election will liventhings up, you say? Maybe not. Regarding the election, we do not believe theoutcome will make a huge difference at all. If Kerry wins, we would expect a hugechunk of U.S. money will be disappointed and avoid stocks. If “Dubya”wins, we would expect European money to be disappointed and to avoid U.S. stocks.
Either way, the only positive impact is that uncertainty will be removed and we areprepared for an eventual (yet another) try at 2004’s strong resistance of the SPX1160 area. Then again, uncertainty for the longer term will not immediately beremoved by either candidate, thus we would not bet the farm on an upside testsucceeding. One look at the charts of a growing cadre of huge American stalwartssuch as General Motors, Triple M, Colgate, Coke and AIG should be sufficient to turn thestomach of even the most perma of “permabulls.” Simply out, gaps on thedownside everywhere you look. If you want action—as usual—the only placeto look is on Nasdaq, where stocks can still trade at ludicrous valuations andnevertheless, be termed bargains by those who scour the stratosphere for“value.” If the valuations of 2000 were proved wanting, then today’svaluations are no bargain. That’s about the only good news we have. Morebad news? CNNfn has announced they are going out of business. This is one ofthose sea change events that herald changing times, another sign that the investing publicis becoming disillusioned.
But there are miles to go before the bear again sleeps (apologies to Robert Frost). For the time being, the trading range rules. SPX 1060 to 1160. An upsidebreakout would turn us more positive, but you knew that already. From here throughApril, a positive spin is available.
Just don’t get too excited.
Stepping even further into an analysis of the six month seasonalaspects, the results during the last secular bear market distinctly differed from the samesix months during all other times since 1950. Our featured chart displays theresults from November through April in the span from 1966 to 1982, a secular bear marketthat began with the Dow's first journey to above the 1000 mark and ended in August 1982with the Dow at only 776. During the bear market, the "good" six monthswere nevertheless down a substantial 41% of the time, seven of 17 years. The averagegain during those periods was only 4.5%, or 9% annualized. The average for all other"good" six month spans was a rousing 9.55%, or 19.1% annualized. If we areindeed now confined to the grip of a secular bear market, even the good times maydisappoint the bulls, especially those who linger on the mistaken notion that the longterm cannot be timed and that stocks must be bought and HELD. If ever there wasconclusive evidence that Wall Street's conventional wisdom was just plain dead wrong, itis startlingly portrayed in this issues charts.
However, since the seasonal aspects have proved exceptionally strongand we have no reason to doubt the phenomenon must end now, we have no choice but totemper our bearish posture accordingly for the time being. Make no mistake, wemaintain our long term bear market low target of Dow 6400 but we cannot make a good casefor the target coming into play over the next six months and probably not at all during2005 for reasons that will be discussed later in this issue. For now, seasonalaspects are not especially bullish, but they must be considered somewhat positive.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTSsince the first issue was published in May of 1990. Mr. Newman is alsoa member of the Market Technician's Associationand has been widely quoted for years by the financial press, media, andother newsletters and has written articles for BARRON'S.
The newsletter is published about 20 times per yearand focuses on economic and stock market commentary, often covering controversialsubjects. Several proprietary technical indicators are usually featuredin every issue accompanied by current interpretation. Broad samplesof our work can be viewed at http://www.cross-currents.net/.
Subscription rates are $169 for one year and $89for six months. A FREE 3 issue trial subscription is available byemailing us (click the "free trial" link above). Pleasenote: trial requests must include name, address and phone numberand must originate from the email address the trial is to be delivered. Trials are only available by Email (.pdf files). U.S. Mailsubscriptions are available but include a nominal surcharge for postageand handling.
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